FL TAX ALERT - USED CAR DEALERS TARGETED!!!!

Posted on Jan 19, 2013 By James Sutton, CPA, Esq.

USED CAR DEALERS ARE THE FOCUS OF A STATEWIDE SALES TAX SWEEP BY THE FLORIDA DEPARTMENT OF REVENUE. HERE IS THE REASON WHY…

Because our law firm practices almost exclusively against the Florida Department of Revenue, we tend to be one of the first people to hear about the 'next big thing' coming through the audit pipeline. If you own a used car dealership in Florida or you have clients that are in the used car dealership industry, then you likely know that the Florida Department of Revenue ("FL DOR") has always given some attention to the industry. First of all, the industry is known for having someone shaky records. But seriously, who can keep clean records when the record keepers have grease on their hands most of the day? Then there are an unusually high number of people that get arrested for sales tax theft in the used car dealer industry, with more than 12 arrests advertised on the FL DOR's web site during 2012. Given all this, it should come as no surprise to anyone that the sales taxes are at least a concern for the industry. However, there has been a recent change in the tactics of the FL DOR that will have a dramatic impact on the used car industry throughout Florida. I bring to you the news about what is coming and what to expect.

First, from a historical perspective, the Florida Department of Revenue has always been able to compare sales tax records with the Department of Motor Vehicle (DMV) records to make sure the company's sales tax records match the cars that are being registered in Florida purchased from that particular dealership. The FL DOR has been doing this for years during every audit of used car dealers (even new car dealers). Hopefully this is not news to you, but many a used car dealer learned about this the hard way. Let's just say that a sales tax audit can be a very expensive educational lesson in Florida sales and use tax law. Given that this possibility is out there, you would think used car dealers would keep pretty good tabs on how well their company is collecting and remitting sales tax to the state. Based on the information I'm getting – this is not the case and the industry should be very concerned. Here's why…

Historically, the FL DOR has only pulled audit records for a particular used car dealer if the taxpayer was under an audit or investigation. The state has never been able to blanketly look at all used car dealers at once and compare the sales tax records with DMV records. The information that we received is that this is no longer the case. The FL DOR figured out way to download the entire DMV database, compare sales tax registration numbers to DMV dealer registration numbers and filter the information into a useable database. Our comrades in Tallahassee are then sorting that information by dealer, by month and comparing this information to the gross sales on each dealer's sales tax return. If the gross sales amount on the sales tax returns is materially less than what the DMV records reveal, then the company will be flagged for an audit or criminal investigation. Our initial information about the FL DOR's research is that a very high number of used car dealers have material underreporting. And the scariest part is that it only takes a very small amount of collected but unremitted sales tax to become a felony in Florida, which includes jail time. [See link at bottom of this article about civil and criminal penalties in Florida sales and use tax law]. Effectively, the entire used car dealer industry in Florida has a target on their back right now.

To understand how this industry focus will happen, we analyze how the DOR handled other industry task force projects. The best example is how the DOR successfully implemented a very similar industry targeted focus on the retailers of alcohol and tobacco in 2012. In 2011, the state started requiring wholesalers of alcohol and tobacco to report sales by month, by type of product, by retailer. With this purchase information in hand, the DOR compared monthly sales tax returns to purchase information to identify liquor store, convenience store, and bar owners that appeared to be under reporting/remitting sales tax. Every one of the over 500 state auditors were assigned at least one convenience store or liquor store and most of the ones I've met have more than one. There are also hundreds of audits coming out of Tallahassee in the form of a letter, called a desk audit, focused on the alcohol and tobacco industry. The FL DOR anticipates started 200 more alcohol/tobacco audits every 3 months until the industry is cleaned up. Our firm represents a considerable number of taxpayers in the retail alcohol and tobacco industry. Almost every assessment that I've seen is over $90,000. So I can say, without a hesitation, that the convenience stores, liquor stores, and bars are reeling from the impact. The used car dealer industry task force can be expected to move forward in very much the same way.

At this point, we expect the first of the new audit notices related to the use car dealer industry target focus to start in the Spring of 2013. So underreporting used car dealers can no longer play the lottery simply hoping the audit notice will not come. The notice is coming. It may not happen this month, but it is coming. The remainder of this article is meant to educate the used car dealers (and their professional advisors) about the perils they face, how the FL DOR is comes up with their sales estimates, and how to handle the matter.

If a notice of audit has not been received and you have underreporting, then we strongly suggest going through a voluntary disclosure to come clean now with a friendly division of the FL DOR and have most of the penalties waived and greatly ensure that the situation does not turn criminal.

THE AUDIT PROCESS

Various businesses will be contacted by different methods, each with their own unique perils. Some people will receive a Form DR-840 Notice to Audit Books and Records, effectively a notice that they are about to go through a FULL AUDIT of all business activity for Florida sales and use tax purposes (about as much fun as a lobotomy). Others will receive a Form
DR-846, Notice of Intent to Conduct a Limited Scope Audit or Self-Audit. Finally, and most disturbing of them all, dealers could receive a
Form DR-1215 – Notice of Intent to Make Audit Changes, without ever having been audited. Whichever type of notice you get, the state can only go back 3 years to assess tax (unless it is deemed criminal, then they will try to go back 5 years). No business owner is happy when they are contacted by a state tax agency, but this last type of notice, the DR-1215, feels like an outright accusation of wrong doing with a demand for more money that most small business owners could not possibly afford to pay. Imagine opening your mail to find that the Florida Department of Revenue, without ever looking at your records, is going to assess in excess of $100,000 plus penalties and interest. Let's start with a discussion of each of these FL DOR Notices.

FORM DR-840 – NOTICE OF INTENT TO AUDIT BOOKS AND RECORDS

The Form DR-840 - Notice of Intent to Audit Books and Records is the standard method of auditing a business. The auditor will examine all areas of potentially taxable purchases and sales to determine whether addition tax is due. While this is the most typical type of audit performed by the state of Florida, we do not expect a major of the used car dealer audits to be handled this way. So we will not go into much detail herein. However, please feel free to contact our offices to discuss this type of audit if you have more questions.

FORM DR-846 – NOTICE OF INTENT TO CONDUCT A LIMITED SCOPE AUDIT OR SELF-AUDIT

The Form DR-846, Notice of Intent to Conduct a Limited Scope Audit or Self-Audit, is considered by the FL DOR a minor audit with a very limited focus of one type of transaction or one particular transaction. However, to a used car dealer with almost 100% used car sales for revenue, this is anything but a minor issue. The notice itself proclaims to be an effort "to ensure compliance with the tax law of Florida and to educate taxpayers about the tax law," while asking the taxpayer to admit very specific facts about purchases and sales of vehicles. In reality, the FL DOR is attempting to get you to admit your taxable sales are higher that what you reported. Most taxpayers are unaware that the FL DOR already has purchase information from the DMV, so providing false information on this form is not only futile, but is very likely evidence of fraud. So used car dealers could unwittingly be lining themselves up for criminal charges, if they have not already done so. Ideally, it is in the taxpayer's best interest to get a Florida Tax Attorney experienced in Florida sales and use tax or other professional involved at this stage. If done correctly, the Taxpayer may be able to avoid the next stage of the process and get the issue resolved accurately and much more cheaply if done at this stage.

FORM DR-1216 – NOTICE OF INTENT TO MAKE AUDIT CHANGES

The Form DR-1216, a Notice of Intent to Make Audit Changes that can be found here. The FL DOR is simply taking the DMV sales records for the company during the audit period and then the DOR assumes that it accurately knows what the total taxable sales should have been. We have found that these tactics often result in wrong information being used against the car dealer.

HOW TO HANDLE THESE CASES

Under Florida law, the DOR only has to make reasonable estimates of what a taxpayer owes, then the entire burden of proof shifts to the taxpayer to prove that the DOR's estimates are wrong. There are a lot of serious flaws in the Florida Department of Revenue's logic in these cases. For example, we expect the DOR to overestimate used dealer sales related to repossessed cars. Then there will be errors between the month the car is sold for sales tax purposes versus the month the car sale is registered for DMV purposes. Most people are surprised to learn that the DOR wants additional tax for months that are under reported but try to deny the dealer a credit for amounts over reported. The result is practically extortion for more tax unless you know how to fight back. How many used car dealers finance the used car? Most! The sales tax should be collected and paid at the time of the sale, not over the period of the loan payments. Not all car dealers handle this probably and it does come up on audit often. However, the interest portion of the financing is not subject to sales tax, but the DOR agent rarely wants to admit this on audit. Just one more thing you have to know how to fight.

Normally, our comrades at the FL DOR are more careful before making such accusations. However, the FL DOR has received too many reports of substantial underreporting of sales tax receipts in the used car industry. So, in their minds, the FL DOR feels justified in being this aggressive. It is the honest (and not so honest) used car dealer that now has to deal with the consequences.

It is a mistake to try and take on FL DOR in these cases without the help of a very experienced Florida sales tax attorney or other professional to guide your business through the process. The stakes are just too high. While there are some serious civil tax risks at stake, there is also the potential for criminal liability. Even if a taxpayer ends up owing some taxes at the end of the day, we can help you negotiate a payment plan or potentially compromise some of the taxes Our lawyers, who also all have strong accounting backgrounds, are experienced in not only defending audits but only handle criminal defense in Florida sales and use tax matters. If you or a client of yours is has been contacted (or you fear being contacted) by the Florida Department of Revenue, then please call or email our offices today for a free initial (and confidential) consultation about your matter.

If you have not been contacted by the Florida Department of Revenue but you are worried that the audit notice is coming, then please contact our office about going through the voluntary disclosure program to work with a more friendly division of the FL DOR, eliminate penalties, minimize the impact of the crazy mark up estimates, and greatly lessen the chance of going through a criminal investigation.

Please also take note, while your accountant is a trusted advisor, there is no protection of confidentiality in criminal proceedings between an accountant and client. Such confidentiality only occurs when speaking with a Florida licensed attorney or an accountant working under an attorney with a Kovell Letter. We work with accountants around the state to assist client in criminal matters.

ABOUT THE AUTHOR: MR. SUTTON IS A FLORIDA LICENSED CPA AND ATTORNEY AND A SHAREHOLDER IN THE LAW FIRM the Law Offices of Moffa, Sutton, & Donnini, P.A. MR. SUTTON IS IN CHARGE OF THE TAMPA OFFICE FOR THE FIRM AND HIS PRIMARY PRACTICE IS FLORIDA TAX CONTROVERSY. MR. SUTTON WORKED FOR THE STATE AND LOCAL TAX DEPARTMENT OF A BIG FIVE ACCOUNTING FIRM FOR A NUMBER OF YEARS AND HAS BEEN AN ADJUNCT PROFESSOR OF LAW AT STETSON UNIVERSITY COLLEGE OF LAW SINCE 2002 TEACHING STATE AND LOCAL TAX, ACCOUNTING FOR LAWYERS, AND FEDERAL INCOME TAX I. YOU CAN READ MORE ABOUT MR. SUTTON IN HIS
FIRM BIO.

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